Sheila Bair: "I'm sure Vikram still blames me"

FORTUNE — Sheila Bair, head of the FDIC during the financial crisis, was strongly critical of Vikram Pandit in her new book Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself. Bair was appalled that Pandit, a hedge fund manager, was chosen to rescue one of the world’s largest banks, and clashed with Pandit over Citi’s failed attempt to buy Wachovia. So it was only natural for Fortune to seek Bair’s reaction to today’s stunning news. Bair is a Fortune contributor. Shawn Tully, Fortune Editor-at-Large, conducted the interview.

Were you surprised by the news today that Virkram Pandit is resigning as ceo of Citigroup (C)? I viewed his resignation as a positive. The board is doing its job, by opening up a new chapter for Citigroup. I take at face value what the board said about his departure. The Citi board is being responsible to shareholders. The bank’s performance under Pandit was very bad. Citi’s board is opening a potentially new direction, and should be commended.

As FDIC chief, you were influential in arranging Wells Fargo’s purchase of Wachovia during the financial crisis. Pandit had wanted to buy Wachovia to expand its undersized branch network. How do you view Citi’s failure to buy Wachovia and had that lost deal might have affected its future? I think a purchase of Wachovia by Citi would have had a very bad result. There were discussions with the NY Fed about Citi buying Wachovia, supposedly with support of the FDIC, without my knowing about it, and with government assistance. There were also discussions between Wells and Wachovia to make what would have been a stabilizing transaction.

We learned from the s&l crisis that putting two sick institutions together ends badly. Wachovia had bought Golden West, which had an extremely troubled mortgage and commercial real estate portfolios, and was still originating bad option arm loans. Neither Wachovia nor Citi were well-managed banks. As analyst Mike Mayo said, if the deal had gone through, it would have been like putting two drunks together. It could have blown up in the FDIC’s face. We needed good management, and Wells was much more experienced at managing troubled assets than Citi.

I’m sure Vikram still blames me, and thinks that all these problems would have gone away if he’d been able to buy Wachovia, with a big subsidy from the government.

Was Pandit’s compensation a problem for shareholders? I think his departure expressed unhappiness with the way the shares were performing. He got a big payout when he sold his hedge fund to Citi, in excess of $200 million. Then within months it had to be closed. His pay as CEO was based on lackluster performance, and shareholders balked. Of all the big banks, Citi’s performance is the worst of the bunch. So the board is doing its job. It’s opening a new chapter. And they’ve chosen someone they’d had experience dealing with, and whose operating capabilities they’ve been able to assess.

Was Pandit’s background as a hedge fund chief as opposed to a banking executive a problem from the start? He was at Morgan Stanley before starting his hedge fund. He had never run a commercial bank. We wanted someone who would take Citi back to its roots, and instead the board picked someone with no experience in banking.

I would agree he never had experience running a large, complex financial organization. It was a very curious choice, and he was chosen over people with a greater depth of experience. I say in the book that it’s my assumption that it was Bob Rubin who wanted Pandit as CEO because of their past relationship. Pandit was not the type of leader you’d want for someone running one of the largest commercial banks in the world.

What’s your view of Michael Corbat’s appointment as the new CEO? The board has much more knowledge of the depth of experience that would qualify him as CEO. I had meetings with him when they had problems during the financial crisis. He came prepared and had ready answers to our questions. Based on my interaction with him, my view is favorable, and the board reached the same conclusion.